Q1 2023 Wayfair Inc Earnings Call
Good day and welcome to the waste that Q1 2023 earnings release Conference call.
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I'd now like to welcome James ramps begin the conference.
James <unk>.
Good morning, and thank you for joining US today, we will review our first quarter 2023 results.
With me are nearing Shah cofounder, Chief Executive Officer, and co Chairman Steve.
<unk> co founder and co chairman and Keith caliber Chief Financial Officer, and Chief administrative officer, we.
We will all be available for Q&A following today's prepared remarks.
I would like to remind you that our call today will consist of forward looking statements, including but not limited to those regarding our future prospects business strategies industry trends and our financial performance, including guidance for the second quarter of 2023.
All forward looking statements made on today's call are based on information available to us as of today's date.
Not guarantee that any forward looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions.
Our 10-K for 2022.
Our 10-Q for this quarter and our subsequent SEC filings identify certain factors that could cause the company's actual results to differ materially from those projected in any forward looking statements made today.
Except as required by law, we undertake no obligation to publicly update or revise any of these statements whether as a result of any new information future events or otherwise.
So please note that during this call we will discuss certain non-GAAP financial measures as we review the company's performance, including adjusted EBITDA.
Adjusted EBITDA margin and free cash flow.
These non-GAAP financial measures should not be considered replacements for.
And should be read together with GAAP results.
Please refer to the Investor Relations section of our website.
To obtain a copy of our earnings release and Investor presentation.
Which contains descriptions of our non-GAAP financial measures and.
Filiation of non-GAAP measures to the nearest comparable GAAP measures.
This call is being recorded and a webcast will be available for replay on our IR website.
I would now like to turn the call over to <unk>.
Thank you James and good morning, everyone. We're pleased to reconnect with you today to share the details of our first quarter results.
Last August we shared our roadmap laying out our path to profitability.
First step was getting back to adjusted EBITDA breakeven.
Through a focus on our three core initiatives of driving customer and supplier loyalty nailing the basics and cost efficiency. We have made significant strides in improving our offering and customer experience, while simultaneously, reducing our cost structure.
These efforts have resulted in increasing market share and a significant reduction in operating expenses versus last quarter getting us to nearly adjusted EBITDA breakeven in Q1 and.
And we're excited to share that we expect to have positive adjusted EBITDA in the second quarter.
We've always known and now we are clearly demonstrating that the wafer model is inherently profitable and that there is considerable opportunity in front of us to rapidly drive further margin expansion, while investing for future growth.
We've reached the profitability milestone in spite of the difficult macro environment. Our business is operated in for the better part of a year.
Our category in particular has been impacted more than others with sales first turning down in March of 2022, and now contracting approximately 20% year over year. According to many of the sources we follow.
While traffic remains challenged our conversion levels have held steady and our work on nailing, the basics and driving customer and supplier loyalty is leading to sustained market share growth.
In the second quarter, we're seeing improving year over year order trends and we're just coming off the back of our seventh way day event.
The beginning of the year as we planned a denser promotional calendar for 2023, we decided to try a three day format for <unk>.
We're very pleased by the engagement from both our suppliers and our shoppers to the extra day.
It's a testament to the hard work and the quality of execution of the team that our model of fast delivery, great availability and sharp pricing is firing on all cylinders, even as we are making meaningful adjustments to our cost base.
As we've done for several quarters I want to update you on different parts of the business and the lens of our three key initiatives.
With cost efficiency.
As part of our $1 $4 billion total annualized cost actions that we outlined in January you've heard us refer to $500 million coming from operational cost savings.
These cost savings initiatives are multifold and manifest across all aspects of our value chain. As we are now starting to see some of the benefits of the savings flow through in our gross margin I wanted to take a few moments to share. Some further examples of these initiatives and provide you some more perspective on our progress.
As we started down the road of driving cost efficiency, our overarching goal was to actually enhance the customer and supplier experience, even as we looked for areas of savings.
One of the ways, we do that is by reducing damage rates, both on specific products as well as in the aggregate.
In instances, where we see rising incident rates, we take a proactive stance and working with our suppliers to identify specific weak points and improved packaging.
Our strength in data science and technology allows us to take this to the next level using information on damage rates to compose better search results for shoppers.
This is one of many factors that has driven our overall incident rate down by over 15% since last summer.
By prioritizing items that we know consistently delight, our shoppers we create a better experience save on after order service expenses and drive a much higher likelihood of generating a repeat order in the future.
Lower cost of delivery directly translates to lower retail prices for consumers.
So another area that we focused on recently is optimization of our last mile costs.
Every product sold on wafer is classified as either a small or large parcel.
So expectations are small parcels averaged 30 pounds and can actually go as high as 150 pounds in some cases.
Our small parcel orders are shipped through carriers like Fedex and as you would expect or less expensive to deliver than large parcel items, most of which are fulfilled through our middle and last mile wafer delivery networks or <unk>.
Trucks are staffed with two person teams rather than just a single driver due to the heavy and bulky nature of the products.
Many items will straddle the line between small or large so we've sharpened our data analytics tools that decide whether a product is classified as a large parcel or not.
For some items large parcel clearly it makes sense to higher cost of delivery is more than offset by the reduced damage rates from the extra care and.
In other cases, we may see that shipping times and damage rates or indifferent, which case classifying the item is a small parcel creates a more compelling retail price while preserving the customer experience.
Our ability to optimize shipping costs has been further enhanced by our efforts to drive more suppliers through castle gate with multiple benefits that accrue to the customer and to wafer <unk>.
Prove forward positioning means fewer logistical touch points and therefore less fulfillment expense, while also resulting in a lower risk of damage and faster delivery times and.
In fact, the percentage of items on the site with speed Badging hit a new record high in the first quarter this year.
These are just two examples across a multi faceted initiatives with more than 70 distinct areas of savings all of which adds up to the more than $500 million I mentioned earlier.
In a few minutes Kate will talk more specifically about the financial flow through here, but I want to acknowledge the speed and thoroughness with which our team has executed on these work streams.
As we started this process last summer, we've now achieved more than half of the targeted savings on an annualized basis and are making steady progress towards completing the remainder by year end.
These are durable process oriented savings that we expect will create improved economics and efficiency on every single order placed and which we believe will lead to higher savings when the volume growth returns.
I mentioned it earlier, but it bears repeating we are extremely proud that even as we have driven these considerable changes across our business. We are still seeing strong market share expansion.
Our second key initiative is driving customer and supplier loyalty everyday.
And the best evidence of our progress here comes from the market share picture.
Market share data from several sources, such as conversations with our suppliers third party research and credit card data.
The picture, we're seeing across all sources as a unified over the past several quarters are cleared resounding winning share for wafer.
<unk> data one of the major credit card data providers recently published their publicly available first quarter home goods market share index for the United States, which shows us the number one position with ongoing share capture for several quarters.
A similar story is playing out in our second largest market, Canada, where we have seen robust share capture since last summer as we've made big unlocks to speak more specifically to our shoppers in the region.
Across our efforts to drive customer loyalty, we recently launched filters to search for products fulfilled from Canada, which our customers in the region love and are highlighting items that are positioned within the country.
Our Canadian customers appreciate the added benefit of surfacing items with faster delivery speeds competitive retail prices and lower incidence rates.
We've also launched a best in class French experience for our wafer dossier shoppers and host Canada specific promotional events like Victoria Day, and Canada days sales speak more directly to our customers in the country.
During these moments, we have partnered with Canadian Influencers and celebrities to further connect with our shoppers and offer them items They will love.
As with the U S. Our core recipe in Canada has never been in a better place strong availability competitive pricing and fast delivery as kept customers coming back.
And this ties in nicely to the third of our key initiatives, namely in the basics.
In that spirit. We recently enabled detailed end to end international tracking on Canadian orders that originate from the United States.
<unk> previously could only see the detailed location of their north bound order once it hit across the border are Canadian customers now have full visibility to where their items are at each stage of fulfillment, which reduces the volume of post order service inquiries.
On the theme of service, we've also strengthened our Canada based customer service team we.
We find that having domestic agents, who understand the unique needs of their local shopper reduces the number of follow ups and immediately improves the customer experience the true meaning of nailing the basics.
As I wrap up I want to zoom back out for a moment.
For several quarters now we've laid out a roadmap for our return to profitability.
Along the way we told you that we intend to be both thoughtful and expeditious as we chart out this journey.
And while we still have more road ahead of US we see our progress over the past nine months is a true proof point that the plan is working.
We're as confident as we've never been that wafer will emerge stronger for it on the other side.
Now with that let me hand, it over to Kate to walk through our financials for the quarter.
Thanks, Neera and good morning, everyone.
Wanted to echo neared his enthusiasm at the promising signs we are seeing for 2023.
Our team has been working hard to execute the plan, we outlined in 2022, and we couldnt be more pleased to see the output now beginning to manifest in the results.
So let's dive into the first quarter figures.
Net revenue for the quarter came in at $2 8 billion down seven 3% year over year.
We are seeing a return to more traditional seasonality in our business and are encouraged by the improving trends, we see in order growth.
As we share before we expected order volume and active customer count to pick up as inflationary prices abated and we are starting to see evidence of this dynamic playing out.
The picture between our geographic segments remains largely unchanged with net revenue in our U S segment down 5% year over year, and our international segment down 14, 4%, excluding the impact of FX.
I'll now move further down the P&L as I do please note that the remaining financials include depreciation and amortization, but exclude equity based compensation related taxes and other adjustments.
We'll use the same basis when discussing our outlook as well.
Gross margin had another stellar quarter coming in at 29, 7%, even as we maintained a robust promotional calendar.
Passing the savings directly onto incremental gross profit driving a higher gross margin. The second is to sharpen our pricing letting the operational savings offset the impact from a reduced take rate effectively netting out too gross margin that remains unchanged, but when the results are more orders and more repeat business.
We will balance this dynamic to keep driving ultimate outcomes over time, our plans are to reinvest some portion of further savings in price in order to drive more volume and maintain a grower sure physician will also balancing gross margin expansion.
Moving on to customer service emergencies, we saw this line come in at 4.7% of net revenue in the first quarter.
Advertising was 11.8% of net revenue as we were driving even better efficiency out of our P channels. While we continue to face the same headwinds on the volume of free and direct traffic that we've seen for several quarters now due to the macro environment.
Finally are selling operation technology general and administrative expenses totaled $484 million as.
As a reminder, the majority of this expense science related to our people and the remainder covers software and other G&A.
You are seeing the majority of the savings from the January a reduction in force reflected in this figure and you should expect to see this number. So further moderation in Q2 as we fully run rate the cash compensation piece of the $750 million of annualized labor savings that we have now completed.
However, we don't see this at the end of our cost savings journey on S. O T G&A and we plan to drive low single digit sequential compression each quarter three year and on top of what we've already accomplished.
All combined the outperformance on gross margin and advertising as well as strengthen the top line contributed to a significant improvement and adjusted EBITDA and negative $14 million this quarter or nearly breakeven.
Substantial improvement compared to the negative $71 million in Q4, 2022 and negative $113 million in Q1 2022.
R U S business second consecutive quarter of positive adjusted EBITDA at $29 million and we nearly have to be international adjusted EBITDA losses compared to Q4.
We are excited to see the tangible benefits of our cost savings work materialize and we remained tightly unified around our future profitability goals.
We ended the quarter with just over $1 billion of cash and highly liquid investments on our balance sheet and over $1.6 billion, a total liquidity when including a revolving credit facility capacity.
Net cash from operations with a negative $147 million in capital expenditures were $87 million, resulting in free cash flow of negative $234 million.
As a reminder, the first quarter is almost always a seasonal cash outflow quarter for our business given the negative cash conversion cycle of our working capital following Q for holiday peak.
Now, let's turn to guidance for the second quarter.
Ordered a date gross revenue has been trending in the negative high single digit year over year, and we expect improvement due to the easier compares in May and June .
We've also spoken recently to you about sequential trends in seasonality and this trend would apply Q want to queue to sequential growth of just below positive 10% for net revenue.
Despite the highly uncertain macro environment and the reduction in a O V. Due to deflation. We are excited by the ongoing improving trends in order of volume and are seen promising signs in the business.
On gross margin, we would guide you to the 29 to 30 per cent range that I framed earlier we.
We continue to expect customer service and merchant fees to be between 4% to 5% of net revenue in advertising to be between 12 and 13% for Q2.
We forecast S O T G&A or opex, excluding equity based compensation and related taxes to come in between 460 and $470 million showing some further improvement from Q1 levels as we fully run rate the savings from earlier in the year.
So finally, as we've said several times already if you follow the guidance I've just outline you should see positive adjusted EBITDA margins and a 0.5% to 1.5 per cent range for the second quarter.
Based on that range, an adjusted EBITDA and the working capital dynamics as we move into the spring you should see a sizeable sequential improvement in free cash flow for Q2 relative to Q1.
We are now reaching the first stage along our profitability path that we set out last August so I want to touch and how we were thinking about the next stage, reaching mid single digit adjusted EBITDA margins and positive free cash flow.
Let me provide an electric model the frame the full pro forma impact of the cost savings that you're seeing starting to flow through to be clear. This isn't meant to be official guidance, but a framework to think about our cost initiatives holistically.
For simplicity, let's use our revenue level from 2022, roughly 12 and a quarter billion dollar top line.
And apply the pro forma annualized impact of our cost savings initiatives that are already well underway and it'll be fully enacted by the end of 2023.
At that level, we would expect to see adjusted EBITDA margins and the low to mid single digit range is gross margins exceed 30% and.
S O T G&A reaches between 14% to 15% of net revenue due to the ongoing savings work I mentioned above.
At that point, we have a cost model that is geared for significant leverage when revenue growth in the future and we expect to the many of our operational efforts will enable the next set of improvements on a roadmap.
As we've said several times in the past once we hit our mid single digit adjusted EBITDA margin range, we intend to treat that if a philosophical floor unprofitability for the business from which we will then balance any growth and investment spending with a desire to also continually increase profitability.
Now, let me translate that into cash flow as many of you know there are two major bridging items between adjusted EBITDA and free cash flow for our business.
Working capital and capital expenditures.
Our business operates on a negative cash conversion cycle, so working capital to source of cash when revenue grow sequentially and vice versa.
The impact of working capital will be entirely a function of your assumptions on revenue.
If you assume capital expenditures at plus or minus $90 million per quarter than the 12 and a quarter billion dollar run rate would also translate deposited free cash flow as well I've sent the working capital dynamics.
Now, let me touch on a few housekeeping items for the second quarter. Please assume the following.
Equity based compensation and related taxes of roughly 170 to 200 million. This will be above trend in queue to as a function of the seasonality of our compensation cycle.
As a reminder, equity based compensation is expense at the share price is that the day. The grants are originally approved as a result of portion of this is related to historical grants that remained in the piano and elevated share prices given the share price volatility we have experienced and the remainder will hit the P&L, depending on the trajectory of the share price going forward on the dates new grass.
[noise] are approved.
Depreciation and amortization of approximately 100 and 207 million net.
Net interest expense of approximately five to 6 million wait.
Weighted average shares outstanding equal to approximately 112 million and Capex and in 90 200 million dollar range.
Before I wrap up I want to take this opportunity to commend our entire team Oh.
Over the last nine months, we've delivered tremendous cost efficiency, while at the same time, bringing are offering to the strongest place and it's been in years.
We are excited about the improvements we are seeing in profitability and optimistic that the success of our core recipe will continue to drive our share gains deeper into 2023.
Thank you and with that new age Steven I will take your questions.
At this time I would like to remind everyone in order to ask a question. Please for stalled on the number one on your telephone keypad.
Request that you keep it to one question and one follow up or pulls but just a moment <unk>.
Your first question comes a lot of Alexandria saga from Goldman Sachs.
Okay.
Thank you for taking my questions I do want a double click on the comments around your cue to revenue growth. How do you think about the key drivers what create upside versus downside in the trajectory for Q2, including the contribution from an extra day for way date or put differently could you maybe walk us through the assumption around customer.
Thanks for your question.
Yeah, So I guess the way to think about is.
In general.
The first half of this year the promotional calendar, we've we've picked up.
This one we did that in the back of a lesser that's in response to the consumer environment.
Will consumers are reacting too and so when we plan that out at the beginning of this year one of the things. We do is we tried to different formats luxury rooms.
And other times, we've run into a 65 day three day, we have different feelings. So this year, we decided to try that sort of way they format of the two days and then the surprise extension and we were happy without.
Webb, that's just one of many things we've done on the promotional calendar side in response to the macro.
Terms of the queue to revenue guide.
Regarding revenue base.
What we're seeing happen and a lot of that has to do with also underlying drivers in the business.
Because.
The revenue level, but you have <unk>.
You mentioned I could order count customer count and what we've been seeing curved interactive customer numbers are sequentially, we're seeing sequential pattern hold and sequentially, we're seeing strength in the business and the core drivers and so for example, maybe.
Maybe we'll get order group you know if you look at our largest bread wafer dot com. It is positive quarter to date in queue to you over your order growth and so there's a lot of different metrics that sort of we're able to see the.
The guys with Ya.
Very helpful. Thank you.
Your next question comes a lot of course holders of JP Morgan Your line is open.
Thanks, and good morning [noise].
Touching on that seasonality point.
Think about what you're saying now, especially compared to a lot of other retailers I think when when all of a sudden Donald.
Pretty tough first quarter here, how are you thinking about that seasonality and and the prospect of <unk>.
Returning to revenue grows about the editor.
<unk> at the enterprise level, you know over the next year.
Thanks for your question, let me, let me throw a couple thoughts Mary Kay can chime in with some more thoughts of her as well I think the biggest thing to keep in mind window that returning to growth is.
Through the first half of this year, we still have unusual revenue compares because we didn't see any kind of normal seasonality a normal kind of we didn't see revenue can normalize after sort of Milwaukee COVID-19 years until the middle of last year. So once you get to the middle of this year. When you go through the second half of this year.
Now what do you think about your over your revenue you have a kind of a base from a year ago, that's normal and you have and what's happening now and as I mentioned your quarter date. For example, the wafer dot com orders are up year over year.
Well, that's not the entire enterprise and that's just one metric it sort of gives you a feel of what's what's happening is we're getting to more of those normalized calm. So I think honestly. It's the kids that are recipes working so what does that that's availability speed of delivery agreed value where continued to make a lot of improvements in the customer service, we're seeing good traction.
Customer reaction to that.
Then I think doing a good job for my kind of order we offer our customers are as I mentioned, a promotional events and how are we sort of responding to what the macro climate is in working with our suppliers to create the excitement and then I think from a technical point you need the normal year ago period in order to have the revenue kind of play out where the where the.
Sort of.
This is growing you see growth and if it's not going you don't see girls were you kind of need last year to be normal too yeah, I I guess, what I would add to that though I think yours touched on some of the seasonality pieces were also obviously to see you know.
All going sustained market share gains and I think that really speaks to the strength of the core offering and so to your point, Chris the macro environment remains somewhat uncertain, we feel very good about our ability to continue capture share in that market and the strength of the core offering as evidenced by things like order volume and Wayfair Dotcom U S.
No turning positive quarter to date.
Yep and then on the pricing from commute can you talk about how you think about your strategy overall now and it's a different is it different from what it used to be you you have these.
<unk>, you know very Folsom savings on the costs of goods line I.
I think he used to try to price to market and not necessarily lead the market on price. How are you thinking about your pricing strategy relative to the overall market level now.
Yeah at Christmas, So I don't know that our pricing philosophy of super different than what it's been for a long time, but just to be clear on what it is for.
So we measure.
The fact of the customers reaction to our price levels with price list the city by different types of goods different charges a price.
That is a factor in deciding what margin levels, we use in different areas of the catalog.
One of the inputs of that is understanding competitively where the field is in terms of competitors at price because obviously that affects the price elasticity kind of dynamic as well when goods get to be more heavily branded the elasticity tends to reflect the needs to be very tight to market on price is good to get to be less branded an increasing.
We also exclusive then there is a factor of kind of you guys need also the customer price value, but there's a wider band of how you can price. So we try to do that quite scientifically and then the underlying thing we've been doing with your site. It is we've been focusing on taking out as much cost as possible. So that we can have a margin we want at retail prices, we like and that's what we've been doing.
Going and so a lot of our ability to you know have you seen the gross margin is held gross margins kind of the way we've been able to improve mercurial structural savings so they're they're they're not things that are fleeting at all and we feel like we can continue to actually unlock value in terms of savings then we can choose to read past those to the customer and gets sharper and.
Rice or do we put some of that into our margin and there's a balance of what we'll do but our philosophy hasn't changed but we weren't a much stronger position than we would have been you know when you know inventory availability was poor or frankly, even before we did some of the things that we've done that advantages yeah. I I think the thing that I would add to that Chris is.
New word mentioned, we're really seeing nicely. He wanted the benefit of those operational cost savings that we laid out in January and that continues to be a lever for us that we can pull throughout the rest of the year as we balance both maintaining and ensuring you know ongoing price competitiveness in this market, but also flowing some of that through to the gross margin.
And you always make another call, we're very focused on generating gross profit dollars over a multi quarter period, I think you'll see some of that balance playoffs or the rest of the year.
Got it thank you very much.
Your next question comes from the line of Brian ago of Oppenheimer Coca.
Your line is open.
Hi, good morning.
Congrats on the progress Sir.
Thanks. Thank.
Thank you.
So a couple of questions first off.
Discussed and your comments, just yoga or just the newer top cut.
Need capital nature, but recognize you have initially given longer term guidance, but we're looking at the business model and you know the business model continued involved here in the house.
Should we think about the longer term capital needs of the business.
Yeah. Thanks for any further questions. So I want to frame of how we think about capex and the components of it there are three key components to Capex. One is that line item that you see that site and software development cause that's capitalized technology labor. So our tech team and you should see that line continue to moderate a bit based on the.
Reduction in force that you've seen in the ongoing efficiency in our Labor force and I think he saw that show up a bit this quarter, that's about 60% of the total capex expenditure in the quarter. The remainder of the P. P and he was really related to two things one ongoing investments in our logistics infrastructure. That's really designed to provide an increased efficiency.
[noise] out of that network and to the bill that ever physical retail network. So and this year that the you know wayfair store to the wall, but in the spring of 2024 as well as two specialty retail brands that will open this year the mix of though is roughly equal for the remainder of the cat back you obviously saw that line moderate a bit in the <unk>.
First quarter and we remain as we do with every line item here, we're very focused on driving efficiency, there and continuing to run that as tightly as possible.
Okay, well, that's that's very helpful. In my second question.
Unrelated but you.
You talked about.
<unk> consumer <unk> early in 2023, you're obviously a lot going on with wafer and water cause you step back how 'bout support you see right now in terms of <unk> interaction you said it was a functional specific efforts on the part of Wayfair versus maybe some easily.
External pressures in this space.
Well.
So let me answer that a couple of different ways. So we're.
We're clearly taking market share. So I think the outcome is relative to competitors were clearly doing meaningfully better because.
That's kind of like I guess, the definition of kind of the market share as to why are we doing better than competitors I think it's less about what the competitors are doing it it's more about what we're doing and so when we mentioned that recipe again, you know great availability fast delivery, great retail prices and then kind of coupling that with all the things we're known.
Four run customer service and emotive shopping experience and product discovery and being tailored for home and auto cover proprietary delivery advantage on heavy bulky items.
That's kind of what we built a business on over 20 years, we had a disruptive coupla years in the middle could you go back a couple of years ago, because the COVID-19 phenomena, while the beginning was a nice boon for a business very quickly it turned into a tough stretch when availability got there's a lot of inflation supply chain kind of short and drove shortages of goods.
And our platform model didn't have the advantage that it has in normal times in in recession times and most times are normal times of recession does were you could argue whether we're in a recession time now because there was an overstock of goods or whether we're in you know kind of more of a normal time, because consumers do have money.
And so.
You know that could be semantics, because clearly the good the goods the home goods market is not kind of on fire right, it's down year over year and stuff, but we have a great value proposition and that is the market gets healthier were set up for that to be a big tailwind because of kind of how we operate so I I do think it's due to our actions.
I appreciate it thank you.
Your next question comes from <unk> from Citigroup <unk>.
Mmm.
Hi, good morning.
Gross margin.
See the outperformance.
I just Wanna maybe.
Get a better picture so.
Misunderstood, but I believe the way you guys feel about the call Sir Francis that it would be more more back have waited and it looks like you're starting to see some of those benefits right. Now so just maybe on on the cost of the cost efforts verses kind of organic improvements around.
Pricing or normalization within that and then if okay increase castlegate adoption, describing some improvements there as well.
Great.
Thanks for the question you know what let me start to answer and then maybe Kate can also jump in on and thought she wants to add.
Let me start by describing store in the gross margin evolution over time, because if you go back for five years.
Gross margin that was more like a 24% type number and back then what we were describing to folks is that we had and originally we described three pillars and then we update as described four pillars that was a runway of over a thousand basis points and what those four pillars were one was what we were doing and logistics, which was building out our own proprietary logistics.
You know, which today comprised of both the the inbound ocean freight leg through Castlegate forwarding, the Castlegate fulfillment operations, which is R warehousing capability and fulfillment capability and then what we're doing that last mile transportation would that be with partners through sortation, an induction or whether that be ourselves on the heavy bulky items and that that could take out.
A lot of course, because excess miles both slows down deliveries increases damage, but frankly drives up costs. So it's a very complicated but exciting area because of how you impact not just the customer getting an item faster, but you take out cause the second of the four pillars was what we were doing around our house brands.
Which were basically our private label brands for recreating curation, creating better merchandising experiences and also increasingly I'm doing that with items that are.
Exclusive or semi exclusive to us and that allowed us back to the question about how do we price and price less the city that allows us to have a wider band in deciding how we price and drives of conversion as well.
The third was just around how was would concentrate volume with suppliers and it's their volume goes up they can actually lower the price of the goods they sell while driving up their profit dollars and so it's a win win for them and for us and for the customer because in that sense. We can basically juicy keep some gross margin or pass it on and that creates a very good dynamic.
And then the last loses the pillar we added was around supplier services and this was as we started to offer services to suppliers outside of just us buying it wholesale selling at retail and selling their item and outside what we're doing on castlegate on the logistics offerings than most notable one of which is our advertising offering where suppliers can advertise on our platforms.
To kind of drive their outcomes and that's an ancillary high margin revenue stream for US, which is still frankly stone. It's early days, it's growing nicely, but it's still early so those four topic areas. We each said had hundreds of basis points in them each and over time, we were gonna unlock them and then choose what if that we put into our gross margin whatever that we pass.
On to the consumer which would allow us obviously drive long term profits because the lower prices drives more conversion drives future orders repeats orders of dollars per customer per year or something.
And so what we've been doing is unlocking that roadmap and then what I mentioned earlier is you have a coupla year disruption in here in 2000, and 122 due to health Covid played out and so the roadmap we have some before that is still the roadmap. We have now we're back a long it and moving along it aggressively uhm and that is create a lot of.
So then specifically noticed zoom in on that kind of you know.
Over $1.4 billion cost actions are supposed to be the file over $500 million of operational cost savings, which is part of that roadmap and how that plays out what that is is that is a reflection of us both being aggressive on a long term roadmap with add and specifically also addressing a lot of inefficiencies that and prepped in a lot of which during the COVID-19 period, which.
Again, it thrown for a loop, but we're sort of will pass now in terms of executing tightly and were unlocking those savings and you are seeing those manifest.
You know in the way that we described where we choose what we put into our margin versus what we do on the retail price, but again unlocking administration, which we keep this so they just build on each other versus kind of evenflo.
So that's kind of how we think about how it's totally okay. Do you want to add anything to yeah, I I think irritate on it nicely in terms of the broad picture and specific to the quarter. You know to your question on Castlegate, what I would add there is that the cost savings that we're talking about in the operational network go cross our entire logistics infrastructure, so that would of course incur.
The castlegate piece of that logistics infrastructure, we're very pleased with how that's manifesting.
The other point that I make on gross margin, while we're talking about it is that I think is a little bit unique to wayfair is that we're able to improve this gross margin during what it's been a highly promotional period for the customer and I think that shows the strength of our model and our ability to you know pass on that value to the customer support frankly, our suppliers, who want to pass on that value to the customer.
But do that well actually raising gross margin throughout 2022, and obviously you know significant gross margin improvement this quarter, and we expect that to sustain and grow from here.
Okay that was really helpful.
And then.
<unk> on the capital allocation Uhm question, a little bit more and maybe violence.
<unk>.
The physical store obscurity investment there.
Mmm.
<unk>, what what the kind of the ultimate goal is one what level of physical infrastructure.
Do the right level that helps.
Build off of the online business and then maybe a second hold on the international Emergency will continue certainly <unk> <unk> <unk> <unk> <unk>.
B well below the the North American business <unk>.
Ah you think about international business and they're both going to be with that thank you. So much.
Sure you got why did I start on the the Capex question and then you know and you can certainly chime in uhm. So on the physical retail pizza just a level set on where we are today, we have two specialty retailer three specialty retail stores open. The first is a small format.
Testing and helping us learn the model physical retail the first large format Wayfair stores. We've mentioned it will open in the spring of 2024, and we're opening two additional specialty retail stores. This year as with all new initiatives. We are really in a testing phase. So we wanted to be prudent and thoughtful about how we roll without learn from these first few.
Doors, and then determine further expansion based on that but I I think what you're seeing now it is really us testing the model and it is starting to put a you know a few players on the board. There I think nearest probably can jump in on physical retail that I'm happy to go back to your second question on the international market interact.
Three.
Okay, I think I was going to touch on slightly differently, which is also just to just to kind of zoom in on the beginning of what you said it was your capital capital allocation questions in.
That one one way I think to answer your question is to think about this.
The $1.4 billion cost actions that plan that we outlined with a plan that we think it's us back to being very focused prioritizing the right actions being very aggressive with that making sure the recipes and tech, but what it didn't do was we didn't try to say hey, how do you cut the cost structure to read.
<unk> optimize the business to maximize profitability today, when we left in it is a very significant amount of expense on things that do not drive productive economic return today, but we think could be meaningful in the future and you know.
International for example is losing money as a segment, but we actually believe that we have real potential there. We have a household Brandon two of the international markets were in we have input metrics, we like in in those markets, we haven't <expletive> more challenging macro and some of those physical retail K mentioned Super early there there's a lot of reason.
Of external proof around how omnichannel drives value, but we're in the early days. So we're gonna right. Now for example, we have a lot of Capex going to open the first wayfair large format store, obviously that store today produces zero revenue, it's not open yet right and so that's that's an expense that we have and so there's areas of the business, where we're aggressively investing for the future.
And we think that that's wise, but we think we can actually be meaningfully profitable while doing that and so that's kind of the way we balance and so we're going to be careful not to have too. Many places that we're investing because each one needs appropriate amount of focus and prioritization in order to really have a shot at succeeding in breaking through but we're also we also have our keeping that.
Board of strategic initiatives that could be meaningful.
You know kind of there and investigate them.
In a healthy way so that there were they actually are set up to flourish and that's kind of the way I think about it yeah. The the overall goal is invest and be profitable right, we want to be driving profitable growth and you'll see those sort of first marker on that and the adjusted EBITDA positive in queue to an international margins is specifically this quarter obv.
See what you've seen there is a significant reduction in the losses, you know, we'd just about half the lawsuit there as we sat on the last call the cost take us that we've done has been across the board. We are focused on driving to profitability everywhere that we operate anything you already mentioned you know we're we're pleased with some of the efforts that we see there we spoke about Canada on the call on the market share.
In Canada and are prominent there the last thing I would add on those margins just to keep in mind we.
Spoken about this before but we do have overhead allocation that goes both to the U S and to our international business and so as we reduce our overhead costs. If you've been obviously working very hard on you'll see some of that benefit float flow through the international EBITDA margins as well.
Alright, so much.
The next question comes from the line of Olive a winter mental from a call I find your line is open.
Yeah. Thanks, if I look at the order is delivered they're back to pre pandemic levels, you know using one Q20.
That's.
Order value still bigger there's probably some some still some inflation into here. If you look at that orders delivered number instead no good way to look at the business.
But you know back to pre pandemic levels and then on the older value how much of that was inflation. Thank you.
[laughter].
Yeah, I'm trying to I'm trying to think what would be helpful to I mean, I guess it way to think about it as I'm inflation front there are significant inflation that inflation is.
Well on its way of coming back out and so one of the things we have mentioned is that.
Starting a year ago basically last summer is really when the rescue got back in tact started with availability getting better in the spring of last year.
But as we went through the summer speed got better and then by late summer price had gotten better and what was really happening. There is a lot of that was suppliers recognizing that shipping costs in particular ocean Fray had abated and starting to price goods, reflecting what their replacement cost of those items would be now that's gonna take a one because there's a lot of.
Excess inventory their when their way through and they don't say price at all to the future price.
Right away, but the debt deflation is is coming through so there there will be some deflation the thing I will point out those.
This has been a question that we got on private called as well well won't then the <unk> will be declined b a drag on revenue and one of the things. We've pointed out is that what we've seen historically is actually that that is an accelerant on conversion effectively on order counted customer count and so when when you're creating the revenue outlook you Gotta take you know kind of customer slash <unk>.
<unk> multiply that by a it'll be right to get revenue and it's well, it's not the easiest math to to kind of think through there's a very direct correlation there and that's what we're seeing play out and we mentioned orders for example away for dot com or or a quarter to date.
You know and I think some of what's made comps or does that again last year first half and wonky comps as those he's you know which they're easier.
And you'll get to the normal period back half of last year, but you know that place through but I think.
These are I think the different moving parts, yeah, I would just reiterate.
To your question, we should be order volume improvement right, though as the a O V. As you pointed out which is still inflated as that starts to moderate we should see that order volume grow and that that translates into customer growth. Those are the right underlying fundamentals right, we'd rather have order volume in customer growth in a O V growth on a sustained period as we can then re market to that.
Customers and they become engaged in the platform. So that that is a trend that we are encouraged by.
Got it and maybe in that regard on the gross margin site.
Have you seen any price elasticity. There like you you you gross margins are grown up which is great, but but revenues are still down is there still way for you to maybe reinvest more in price and get you know the revenues and orders orders up or have you not seen the price elasticity when you reduce prices.
Well. This is what I tried to address earlier when I'm, sorry about gross margin that that opportunity is definitely there but.
That's what we're doing so in other words, we're continuing to unlock cost savings. We're then deciding what we put into price lowering price and what we put into our gross margin and there's there's kind of a pretty heavy roadmap. There. So there there's definitely opportunity for us to continue in the plan is for us to continue to do that as we go through time yeah.
We have a very sophisticated pricing model mechanism to this is something that we constantly are pressure testing. We said, we'd achieved about half of those operational cost savings. So there's more to go there and we can make you know real time decision on how much of that flowed through to price to your point in January you know future.
Orders and how much of that flows directly through the gross margin and that will depend a little bit on the market and what we're seeing with our customer.
Got it thanks, very much and good luck. Thanks.
<unk>.
Your next question comes from the <unk> from Nathan Your line as I could.
Great. Thank you so much and good morning <unk>.
Bladder with questions [laughter], Hi, one on active customers you've seen some stability at the enterprise level in Alaska couple of quarters already just curious what does that number look like for U S. Only just any color what are you seeing in terms of gross adds.
<unk> in the U S. As some of the promo initiatives are clearly resonating with a consumer and then secondly, I wanted to follow up on advertising. So your sales came in on plan and advertising was below the range. You'll have provided could you talk about what you're seeing there with the efficiencies and what is it.
Working specifically.
Yeah.
On the first question run active customers I think we've tried to point out that sequentially, you're seeing that numbers start to stabilize and we mentioned quarter today, you know and wafer Dot Com for example, order count is up quarter.
Quarter today in terms of the act of customer come for the USA allocates comment on that I don't I don't know what we.
We actually we don't disclose the break out, but I think you're you're pointing to a trend that you can see in the revenue breakouts across the U S and the international business and certainly have already mentioned the the order of peace in the U S that would probably naturally equate to you know customer improvement in the U S, but that's relative to the international business.
I think your second question with an atheist, our leverage in and how we're looking at that you know for the quarter.
Okay cause I just jumping on that and then you can maybe add.
Let's do it.
Yeah. So.
Advertising you know again at $1.4 billion in over $1.4 billion set of cost actions that we outlined in January to help folks try to understand everything we'd been talking about since last summer, but put it into context.
We we excited advertising on there is one of the items I think was a third third item on the list isn't a group and some other things.
And advertising here is I think it's important to understand how we think about the cost of things I think there is sometimes a misconception.
And so I think the easiest way to think about it think of it as having three buckets of that cost and the first bucket, which is by far the largest bucket.
Figure that is kind of evergreen.
And by Evergreen way I mean, these are different advertising channels that are highly measurable that are under very tight paybacks and that where we are looking to increase our spin there, but within that payback constraint, that's very tight and very measurable.
How can we do that we can do that with targeting we can do that with different creative AD units, we can do that by upping the conversion on the traffic and.
And so that we're continuing to maximize.
Then there is a second bucket, which is generally top a funnel type advertising so television would be kind of a poster child of this but there's other things in this bucket.
Those are channels that we can measure, but the error band around measurement there is larger.
Can't measure quite as precisely as you can measure that first bucket.
The measurement methods. Therefore, triangulating on what you believe the the values there so inside that band you could spend at the low end of the band or the high end of the band and it would be within the band that you think is productive for the spend but again there is an Arab and their their what we've done is we've bias towards being lower in the band rather being higher in the band and we're getting good rest.
<unk>.
And then the thick of the third bucket as in R&D bucket. So these are advertising channels that do not yet operated the payback, we want them to but we believe they could.
So we're experimenting in these channels figuring out what you know trying to find breakthroughs of what works what doesn't work and once you get to a productive approach there were getting the payback you want you within scale it and these channels within Goin', either bucket water bucket too depending on what kind of advertising channel. It is.
They are what we've done is we're taking the top down approaches, saying, hey, what percent of our AD budget or how many dollars are we willing to put into R&D.
And then we take it we are now taking that amount in deciding bolster now which of these opportunities. We see do we want to invest in to get breakthroughs.
And we're kind of doing that top them rather than bottoms up cause bottoms up you could end up with many different opportunities with many different ideas of what to test and they could add up to being a higher percentage of your total AD spend then you would like it will obviously deleverage racy and are because it's running at a very high as in our percentage is not pay back yet and so by deciding cut down you know again.
This is James we're really sorry, if that's what we did is that still a good amount of money to spend but it's it's defined to me they make sure it doesn't grow to be too high percentage picked by doing et cetera, and that that is also driven benefit nice you know so a CNR, we've been able to make more efficient without hurting our ability to strategically use advertising to grow.
So.
And then remember this is all with the headwind of the free paid mix, which we talked about and prior calls which is easily easiest way to think about this is the categories currently out of favor right. We tried to other category being down 20% year over year.
Well the category, it's a discretionary.
Category and its interests will ebb and flow with the kind of kind of broader economy, and then frankly it has a bigger ebb and flow. When you think about the COVID-19 sort of boom at the very beginning of Covid and then that kind of boom that followed it and the thing that people had a busted, which was travel entertainment restaurants spend.
Both of these boom bust cyclical normalize out they typically are more correlated to each other around the economy.
And as it does that three paid mixture turn into being a tailwind because people are just naturally more interested in the category. The easiest. Illustrative example is if travels in a boom cycling homes not if you get an email from booking dotcom and an E mail from wafer, which one are you more likely to click on simply foot and that's kind of like that's the payment. So that's still a headwind so that's kind of.
The AD cross gotten much more efficient sort of what I described about the three buckets and that's despite the headwind.
Okay. Okay. That's really helpful. I appreciate advice and the best of luck.
I think I think we just have the time for one more question.
And our last question comes from the lineup Curtis Nagle from <unk>. Your line is that good.
Mmm great. Thanks, so much.
Quick ones just one how do you think about I, just need which were flown industry come through the rest of Europe . It seems like that's been and I still want you guys to think that continues maybe.
There's a surplus is call you back up a little bit and then just you any commentary in terms of just the latest thinking.
Addressing the yoga twenty-five version kind of what's the strategy around that.
Yeah, Great. Let me answer the first part about inventory flow in the mail turn it over to Kate to answer the second question about the.
That's a comfort zone.
On the inventory flow.
Since last spring suppliers of had excess inventory.
And that depending on the supplier and how aggressive they were on it and where they started from some have worked their way through it some are still working their way through it somebody they they still it'll take him into early next year to work their way through it.
<unk>.
Cautionary around thinking that as a temporary sort of tailwind or temporary help.
Way to think about it is actually the way the business model works is it our model works very well, whether there's kind of an appropriate amount of inventory or an excess amount of inventory because what it does is it basically allows us suppliers to lean in and compete against one another to put value in front of the customer the excess inventory actually is a bit of a challenge right now because it came in.
That's such a high cost basis suppliers are not in a great position to necessarily be as aggressive as they would like to be in his normalizes. They didn't bring goods in that or at a more normal level actually the wholesale cost and therefore, the retail cost will continue to decline as it normalizes out not increase and so that's kind of a nuance based on the dynamic of what.
Happened a year ago, but it is an important one to appreciate because as we get further into this cycle, we believe that our competitive position actually gets advantaged more not disadvantage.
Just to touch on your your question around the capital structure. So we you know you are referencing the 2025, they just remind everyone that as of late 2025 maturity and we believe we have multiple options at our disposal for how to manage this going forward and will continue to be opportunistic there. They point you to our September transaction, which is a liability management.
We pushed out some of the 2024 and 2025 maturity is the kind of thing that we might do going forward and I think that's a good example of how we look at it.
Okay. Thank you.
Great with that thank you everyone for joining thank you everybody construction next door.
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